New UK Requirement On Large Businesses To Notify Uncertain Tax Treatment

Large businesses will be required to notify HMRC when they apply uncertain tax treatment, under new draft legislation published in July 2021.

Tax treatment will be uncertain where it meets one of three triggers (outlined below). Although these have reduced in number following two consultation processes, one in particular remains very wide in scope, and large businesses will want to consider the new rules carefully.

The rules will apply to uncertain tax treatments reflected in returns filed on or after 1 April 2022, so could catch transactions which are occurring now. Notifications will be required to be made annually, and separately in relation to each tax within scope (corporation tax, VAT and income tax, including PAYE).

Why is this new requirement being imposed?

The aim of the rules is reduce the amount of the tax gap attributable to legal interpretation, by encouraging businesses to discuss uncertain tax treatments with HMRC sooner, and without the need for costly litigation. HMRC expects this measure to “level the playing field” between those businesses which are already open and transparent with HMRC and those which are not, and to promote certainty and improve taxpayers’ trust in the system.

How will the new rules work?

Businesses in scope, the threshold test, and consequences of non-compliance

Companies and partnerships (including LPs, LLPs and foreign equivalents) with a UK turnover of at least £200m or a UK balance sheet total of more than £2bn are in scope. For companies that are members of a group, UK turnover and UK balance sheet totals of group companies within the charge to UK corporation tax on income are aggregated. Investment managers can disregard subsidiary companies managed in the ordinary course of the investment manager’s business. In total, around 2,300 businesses are expected to be impacted.

Such businesses are required to notify HMRC if (i) a relevant return applies an “uncertain” tax treatment, i.e. an amount in relation to which one or more of the three triggers for notification are met, and (ii) the threshold test is met. The threshold test is (broadly) that the uncertain tax treatment has produced a benefit of over £5m over a 12 month period. The consequence of non-compliance is a £5,000 penalty (which escalates if there are repeated failures).

Triggers for notification

This is the most objective of the three triggers and should be the most straightforward to apply in practice.

HMRC’s interpretation or application is taken to be known by an in-scope business if it is apparent from guidance, statements, or other HMRC material which is generally applicable and readily available in the public domain; or it has been expressed directly to the business in its dealings with HMRC.

Where HMRC’s position is unclear, or where two different expressions of HMRC’s known position appear contradictory, there will be no “known position” and the second trigger will not be met; according to draft guidance (published in August) generally more recently published guidance is expected to take precedence over older guidance where there is a potential conflict. Also according to the August draft guidance, explanatory and technical notes relating to legislation, and submissions HMRC makes in litigation, will not count as indications of HMRC’s known position.

The draft guidance lists several factors that, whilst not conclusive, “indicate” that the trigger has been met. Indicators include that the decision over the correct treatment is fairly balanced, or there is genuine doubt over how the law should be interpreted. A third indicator is where different advisors recommend different tax treatment. HMRC had originally proposed, and then discarded following consultation, a trigger which was satisfied where contradictory, and non-privileged, professional advice was received. The presence of this indicator clarifies that the discarded trigger lives on through the “substantial possibility” trigger, and moreover there is now no carve out for privileged advice.

Other indicators include where the business has concluded that there is a high risk that the filing position will not be sustained, or where a provision has been made in the accounts which is immaterial from an audit perspective or not strictly in accordance with UK GAAP.

This trigger, which is wider in scope and considerably less objective than the first two, will undoubtedly cause difficulties for businesses applying the rules. It is made more challenging by the lack of a definition of “substantial possibility”. Somewhat helpfully, the legislation does at least make clear that an HMRC challenge to a tax treatment does not necessarily mean this trigger has been met.

Exemptions

In addition to the application of the threshold test, there are some important exemptions from the new notification requirement. The most significant, which is clearly designed to drive behavioural change and encourage up-front discussions with HMRC, applies where the business can reasonably conclude that HMRC already has available to it substantially all of the information that would have been included in a notification. This includes where the information has been provided under another disclosure regime, or the tax treatment has already been discussed with HMRC. In response to concerns raised at consultation stage that those businesses without a Customer Compliance Manager would be disadvantaged, HMRC has included in its draft guidance a link to a webpage form that such businesses should use as an alternative contact route.

There are also exemptions for intra-group transactions, where the net value for the group of the relevant corporation tax advantage falls below the £5m threshold, as well as for attribution of profits positions and transfer pricing methodology choices that fall foul of the third trigger.

What are the next steps, and what should businesses do now?

Government consultation on the draft legislation has now closed, but the Finance Bill Sub-committee is inviting written submissions on aspects of the new regime until 13 October. Once enacted (through the next Finance Bill), it will apply in respect of returns filed on or after 1 April 2022.

Consequently, businesses in scope should start to consider now whether any transactions already undertaken or anticipated in the current financial year may meet the tests for notification, and if so, whether to begin to discuss those with HMRC. The draft guidance sets out the details required in notifications, including an explanation of the uncertainty and an indication of the amount of the tax advantage; any discussions with HMRC will need to include these details in order to meet the first exemption.